<PAGE>
                              CAUTIONARY STATEMENT
 
    ARCADIA FINANCIAL LTD. (THE "COMPANY"), OR PERSONS ACTING ON BEHALF OF THE
COMPANY, OR OUTSIDE REVIEWERS RETAINED BY THE COMPANY MAKING STATEMENTS ON
BEHALF OF THE COMPANY, OR UNDERWRITERS OF THE COMPANY'S SECURITIES, FROM TIME TO
TIME, MAY MAKE, IN WRITING OR ORALLY, "FORWARD-LOOKING STATEMENTS" AS DEFINED
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "ACT"). THIS
CAUTIONARY STATEMENT, WHEN USED IN CONJUNCTION WITH AN IDENTIFIED
FORWARD-LOOKING STATEMENT, IS FOR THE PURPOSE OF QUALIFYING FOR THE "SAFE
HARBOR" PROVISIONS OF THE ACT AND IS INTENDED TO BE A READILY AVAILABLE WRITTEN
DOCUMENT THAT CONTAINS FACTORS WHICH COULD CAUSE RESULTS TO DIFFER MATERIALLY
FROM SUCH FORWARD-LOOKING STATEMENTS. THESE FACTORS ARE IN ADDITION TO ANY OTHER
CAUTIONARY STATEMENTS, WRITTEN OR ORAL, WHICH MAY BE MADE OR REFERRED TO IN
CONNECTION WITH ANY SUCH FORWARD-LOOKING STATEMENT.
 
    THE FOLLOWING MATTERS, AMONG OTHERS, MAY HAVE A MATERIAL ADVERSE EFFECT ON
THE BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OPERATIONS OR
PROSPECTS, FINANCIAL OR OTHERWISE, OF THE COMPANY. REFERENCE TO THIS CAUTIONARY
STATEMENT IN THE CONTEXT OF A FORWARD-LOOKING STATEMENT OR STATEMENTS SHALL BE
DEEMED TO BE A STATEMENT THAT ANY ONE OR MORE OF THE FOLLOWING FACTORS MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENT
OR STATEMENTS.
 
LIQUIDITY AND ACCESS TO CAPITAL RESOURCES
 
    NEGATIVE OPERATING CASH FLOWS.  The Company's business requires 
substantial cash to support the payment of dealer participations, the funding 
of spread accounts in connection with securitizations, the purchase of loans 
pending securitization, the financing of repossessed inventory and other cash 
requirements, in addition to debt service. To the extent that increases in 
the volume of loan purchases and securitizations provide income, a 
substantial portion of such income is received by the Company in cash over 
the life of the loans. The Company has operated on a negative operating cash 
flow basis and expects to continue to do in the near future. The Company has 
historically funded these negative operating cash flows principally through 
borrowings from financial institutions, sales of equity securities and sales 
of senior and subordinated notes. The Company expects that it will require 
additional capital in the future to fund continued negative cash flows, 
although there can be no assurance that the Company will have access to the 
capital markets in the future or that financing will be available to satisfy 
the Company's operating and debt service requirements or to fund its future 
growth. Factors which could affect the Company's access to the capital 
markets, or the costs of such capital, include changes in interest rates, 
general economic conditions, the perception in the capital markets of the 
Company's business, results of operations, leverage, financial condition and 
business prospects, and the performance of the Company's securitization 
trusts. In addition, covenants with respect to the Company's debt securities 
and credit facilities may significantly restrict the Company's ability to 
incur additional indebtedness and to issue new classes of preferred stock.

    POTENTIAL INABILITY TO REFINANCE EXISTING INDEBTEDNESS.  The Company's
ability to repay its outstanding indebtedness at maturity may depend on its
ability to refinance such indebtedness, which could be adversely affected if the
Company does not have access to the capital markets for the sale of additional
debt or equity through public offerings or private placements on terms
reasonably satisfactory to the Company. See "Negative Operating Cash Flows"
above.
 
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    DEPENDENCE ON WAREHOUSE FINANCING.  The Company depends on warehouse 
facilities with financial institutions or institutional lenders to finance 
its purchase of loans on a short-term basis pending securitization. At March 
31, 1998, the Company had $875.0 million of warehouse facilities through 
various financial institutions and institutional lenders, of which $821.1 
million was available. These facilities expire from July 1998 through October 
1999, subject to renewal or extension at the lenders' option. There can be no 
assurance that such financing will continue to be available on terms 
reasonably satisfactory to the Company. The inability of the Company to 
arrange additional warehouse facilities or to extend or replace existing 
facilities when they expire would have a material adverse effect on the 
Company's business, financial condition and results of operations and on the 
Company's outstanding securities.

    DEPENDENCE ON SECURITIZATION.  The Company has relied upon its ability to 
aggregate and sell loans as asset-backed securities in the secondary market 
to generate cash proceeds for repayment of warehouse facilities and to 
purchase new loans from dealers. Since inception, the Company has securitized 
approximately $9.3 billion of automobile loans. At March 31, 1998, 
approximately $5.0 billion of these loans were outstanding. Accordingly, 
adverse changes in the Company's asset-backed securities program or in the 
asset-backed securities market for automobile receivables generally could 
materially adversely affect the Company's ability to purchase and resell 
loans on a timely basis and upon terms reasonably satisfactory to the 
Company. The Company endeavors to effect public securitizations of its loans 
on at least a quarterly basis. However, market and other considerations, 
including the conformity of loans to insurance company and rating agency 
requirements, could affect the timing of such transactions. Any delay in the 
sale of loans beyond a quarter-end would eliminate the related gain on sale 
in the given quarter and adversely affect the Company's reported earnings for 
such quarter. All of the Company's securitizations since March 1993 and one 
of the Company's warehouse facilities have utilized credit enhancement in the 
form of financial guaranty insurance policies issued by FSA to achieve 
"AAA/Aaa" ratings with respect to the asset-backed securities. The Company 
believes that financial guaranty insurance policies reduce the costs of the 
securitizations and such warehouse facility relative to alternative forms of 
credit enhancements available to the Company. FSA is not required to insure 
Company-sponsored securitizations and there can be no assurance that it will 
continue to do so or that future Company-sponsored securitizations will be 
similarly rated.
 
LOAN PERFORMANCE RISKS
 
    POTENTIAL NEGATIVE EFFECTS ON FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
LIQUIDITY.  The Company's business, financial condition, results of operations
and liquidity depend, to a material extent, on the performance of loans
purchased and sold by the Company. When such loans are sold in securitizations,
the Company recognizes gain on sale. Finance income receivable, the Company's
principal asset, has been calculated using assumptions concerning future
default, prepayment and net loss rates on securitized loans that are consistent
with the Company's historical experience and market conditions and present value
discount rates that the Company believes would be requested by an unrelated
purchaser of an identical stream of estimated cash flows. Management believes
that the Company's estimates of excess cash flow were reasonable at the time
each gain on sale of loans was recorded. However, the actual rates of default
and/or prepayment and/or net loss on such loans may exceed those estimated for
purposes of calculating the Company's finance income receivable and consequently
may adversely affect anticipated future excess cash flow. The Company
periodically reviews its default, prepayment and net loss assumptions in
relation to current performance of the loans and market conditions, and, if
necessary, writes down the balance of finance income receivable. The Company
made a significant adjustment to its finance income receivable at March 31, 1997
after completing such a review, primarily relating to the recovery rates on
repossessed vehicles and the Company's disposition strategy. The Company's
business, financial condition, results of operations and liquidity could be
materially adversely affected by such adjustments in the future. No
 
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assurance can be given that loan losses and prepayments will not exceed the
Company's estimates or that finance income receivable could be sold at its
stated value on the balance sheet, if at all.
 
    POSSIBLE RESTRICTIONS ON CASH FLOW FROM SECURITIZATIONS.  The Company's 
future liquidity and financial condition, and its ability to finance the 
growth of its business and to repay or refinance its indebtedness, will 
depend to a material extent on distributions of excess cash flow from 
securitization trusts. The Company's agreements with FSA provide that the 
Company must maintain in a spread account for each insured securitization 
trust specified levels of excess cash during the life of the trust. These 
spread accounts are initially funded out of initial deposits or cash flows 
from the related trust. Thereafter, during each month, excess cash flow due 
to Arcadia Receivables Finance Corp. ("ARFC") from all insured securitization 
trusts is first used to replenish any spread account deficiencies and is then 
distributed to the Company. The timing and amount of distributions of excess 
cash from securitization trusts varies based on a number of factors, 
including but not limited to, loan delinquencies, defaults and net losses, 
the rate of turnover of repossession inventory and recovery rates, the ages 
of loans in the portfolio, prepayment experience and required spread account 
levels. A deterioration of the Company's loan delinquencies, cumulative 
defaults or net losses, a build-up in repossession inventory, the continuing 
increase in the proportion of repossession inventory sold in the wholesale 
auction markets, or an increase in loans entering the seasoning period, could 
reduce excess cash available to the Company. At March 31, 1998, the Company 
had an aggregate of $261.3 million of restricted cash in spread accounts. 
There can be no assurance that in the future the Company will not experience 
an interruption of excess cash flow from ARFC, which could adversely affect 
the Company's ability to pay its obligations.
 
    Each insured securitization trust has certain portfolio performance tests 
relating to levels of delinquency, defaults and net losses on the loans in 
such trust based in part on the relative percentage of Premier and Classic 
loans. Portfolio performance tests require that the loan portfolio of each 
insured securitization trust (i) have an average delinquency ratio not equal 
to or in excess of a specified percentage, (ii) have a cumulative default 
rate not equal to or in excess of specified percentages which vary based on 
the aging of the loan portfolio, and (iii) have a cumulative net loss rate 
not equal to or in excess of specified percentages which vary based on the 
aging of the loan portfolio. If any of these tests are exceeded (a 
"violation"), the amount required to be retained in the spread account 
related to such securitization trust will be increased to an amount generally 
equal to the greater of 10% of the outstanding balance of loans or 1% of the 
original balance of loans held by the securitization trust. As a consequence, 
a violation generally will decrease excess cash flow available from such 
securitization trust until loan portfolio performance has returned to the 
required limits for a specified period, generally three to five months, 
unless waived by FSA. FSA and the Company have an arrangement under which, if 
any insured securitization trust exceeds the specified portfolio performance 
tests, ARFC may, in lieu of retaining the excess cash from that 
securitization trust in the related spread account, pledge an equivalent 
amount of cash, which has the effect of preventing the violation of the 
portfolio performance test. Although certain trusts, primarily those that 
contained loans originated in 1995, have exceeded portfolio performance tests 
and are still in excess of such tests, this arrangement with FSA has 
prevented a violation, although it has reduced the amount of cash that would 
otherwise have been available to the Company for use if the Company had 
sought and received a waiver of such violation from FSA. A deterioration of 
the Company's delinquencies, cumulative defaults or net losses would result 
in one or more additional existing securitization trusts exceeding one or 
more of these tests in the absence of changes to the trigger levels. There 
can be no assurance that, in such event, waivers will be available from FSA 
permitting payments to ARFC.
 
    Upon the occurrence of certain events with respect to any series of
asset-backed securities insured by FSA, including the failure to meet loan
portfolio performance tests of the nature described above but at significantly
higher levels, or upon a breach of the collateral coverage requirements of the
FSA-insured warehouse facility (an "Insurance Agreement Event of Default"), the
Company will be in default under its insurance agreement with FSA. Upon an
Insurance Agreement Event of Default, unless waived by FSA,
 
                                       3
<PAGE>

FSA may suspend distributions of cash flow from the related securitization 
trust and all other FSA-insured trusts (including the FSA-insured warehouse 
facility) until the asset-backed securities have been redeemed, capture 
excess cash flow from performing trusts, increase its premiums and replace 
the Company as servicer with respect to all FSA-insured trusts. There can be 
no assurance that a further deterioration of the Company's loan 
delinquencies, gross charge-offs and net losses would not result in an 
Insurance Agreement Event of Default, which could adversely affect the 
Company's ability to satisfy its obligations. Certain of the Company's 
securitization trusts have exceeded such insurance agreement thresholds and 
continue to exceed such thresholds and the Company has obtained waivers from 
FSA to permit distributions of cash to ARFC. There can be no assurance that 
in the future, if such thresholds are exceeded, waivers will be available.

    In addition, the spread account for each securitization is 
cross-collateralized to the spread accounts established in connection with 
the Company's other securitization trusts (including the FSA-insured 
warehouse facility) such that excess cash flow from a performing 
securitization trust may be used to support negative cash flow from, or to 
replenish a deficient spread account in connection with, a nonperforming 
securitization trust, thereby further restricting excess cash flow available 
to ARFC. If excess cash flow from all insured securitization trusts is not 
sufficient to replenish all such spread accounts, no cash flow would be 
available to the Company from ARFC for that month. Excess cash flow has been 
interrupted in the past, and there can be no assurance that in the future the 
Company will not experience an interruption of excess cash flow from ARFC 
which could adversely affect the Company's ability to pay its obligations. 
FSA also has a collateral security interest in the stock of ARFC. If FSA were 
to foreclose on such security interest following an event of default under an 
insurance agreement with respect to a securitization trust (including the 
FSA-insured warehouse facility), FSA could preclude payment of dividends by 
ARFC to the Company, thereby eliminating the Company's right to receive 
distributions of excess cash flow from all the FSA-insured securitization 
trusts. The Company's right to service the loans sold in securitizations 
insured by FSA is also generally subject to the discretion of FSA. 
Accordingly, there can be no assurance that the Company will continue as 
servicer for such loans and receive related servicing fees.

    Any increase in limitations on cash flow available to the Company from 
ARFC (including any increase in the amount of cash pledged under the 
arrangement with FSA), inability to obtain any necessary waivers from FSA or 
termination of servicing arrangements could materially adversely affect the 
Company's cash flow and liquidity, and, ultimately, its business, financial 
condition and results of operations and its outstanding securities.
 
    IMPACT OF PORTFOLIO GROWTH AND PRODUCT MIX.  Historically, the 
statistical incidence of delinquencies and defaults in connection with 
automobile loans tends to vary over the age of the loan. For example, 
statistically, loans that are between six and fourteen months old have had a 
higher likelihood of being delinquent or defaulting than loans with similar 
credit characteristics that are three months old. Accordingly, to the extent 
that the Company's historical portfolio growth has resulted in a servicing 
portfolio containing disproportionately more loans originated within the 
prior six months, the current and historical delinquency and default rates of 
loans in the servicing portfolio may understate future delinquency and 
default rates.
 
                                       4
<PAGE>

    In addition, to the extent the Company offers new loan products which 
involve different underwriting policies, the delinquency and default rates of 
the Company's servicing portfolio may change. The Company has instituted a 
tiered pricing system and has periodically increased the amount of loans 
purchased under its Classic program, which involves borrowers who do not meet 
all of the underwriting standards in the Company's Premier program and are 
charged rates of interest higher than those under the Company's Premier 
program. The Company increased its purchase of loans under the Classic 
program from 17% of the principal amount of loans purchased in 1995 to 36% in 
1996, 55% in 1997 and 71% in the first three months of 1998. As a result of 
the increases in Classic loans as a proportion of the Company's portfolio, 
there has been an increase in the rates of, and reserves for, delinquencies, 
repossessions and losses historically reported by the Company. The expansion 
of the Classic loan program and seasoning of the Company's existing servicing 
portfolio will likely continue to cause the Company's loan performance 
statistics to show higher delinquencies, gross charge-offs and net losses 
when compared with historical performance even if such loan performance 
statistics are consistent with the Company's reserves for loan losses.

    To estimate future delinquency, repossession and loss experience on 
its loans, the Company uses a combination of factors, including actual loan 
performance experience for that loan program, and industry experience on 
loans with similar credit characteristics. However, there can be no assurance 
that its loans will perform under varying economic conditions in the manner 
estimated by the Company. Any increase in delinquency, repossession and loss 
rates related to its loans above the rates estimated by the Company could 
have a material adverse effect on the Company's business, financial condition 
and results of operations, as well as its liquidity. In addition, certain of 
the Company's loan products which produce higher delinquency, repossession 
and loss rates than expected may continue to have an impact on the Company's 
overall loan performance, even after being discontinued or modified, until 
the loans generated mature beyond the six- to fourteen-month period. In 1996, 
the Company discontinued a Classic loan product directed at first-time 
credits and modified a Classic program for financing the sale of its 
repossessed inventory in retail markets, each of which had experienced higher 
than expected delinquency, repossession and loss rates, but the loans 
generated under this program have continued to impact the performance of those 
securitization pools containing them.

    EXTENSIONS AND AMENDMENTS.  Like others in the industry, the Company 
gives certain obligors extensions or amendments to loan terms in certain 
circumstances, including when the Company believes such obligors will thereby 
be more likely to repay their loans, and losses on such loans can be reduced. 
Loans that have been extended or amended generally present substantially 
higher default risks than loans that have neither of these characteristics. 
Primarily as a result of the expansion of the Classic program (which involves 
higher credit risks than the Premier program), the portion of the Company's 
servicing portfolio which exhibits one or both of these characteristics has 
increased. Extensions and amendments (in the aggregate) averaged 
approximately 3.3% of the servicing portfolio per month in 1997, 2.7% per 
month in 1996 and 1.9% per month in 1995, and with seasonal peaks occurring 
during the Christmas holiday season. Extensions and amendments (in the 
aggregate) averaged approximately 3.3% per month for the first three months 
of 1998, compared to 3.8% per month for the first three months of 1997. The 
Company believes that one reason for the increase in extensions and 
amendments as a percentage of the servicing portfolio during 1997 and the 
first three months of 1998 is the slower rate of growth in the size of the 
Company's portfolio, which results in a higher percentage of loans of the age 
that are more likely to be extended or amended. Any continued slowing of 
growth could contribute to a further increase in such statistics. The Company 
considers these characteristics when establishing its loss reserves. In 
certain circumstances, loans that have been extended or amended have the 
effect of removing the related loan from delinquent status.
 
    POTENTIAL NEGATIVE IMPACT OF COVENANTS UNDER FINANCING AGREEMENTS.  
Increases in loan delinquency and loss rates with respect to any 
securitization trust may result in the trust's portfolio exceeding the 
various pool performance levels established by FSA, thereby restricting or 
cutting off cash distributions from the securitization trust spread accounts 
to ARFC (and thus to the Company). See "Cash Flow from Securitizations" 
above. In addition, such
 
                                       5

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increases may cause the Company to exceed certain pool performance tests 
established in other agreements governing its indebtedness. If at the end of 
any month the Portfolio Loss Ratio (as defined) exceeds 3.5% (which is 
calculated excluding the effect of the Company's March 1997 special charge), 
the Company's Delinquency Rates (as defined) exceed 3.5%, the Warehousing 
Loss Ratio (as defined) exceeds 1.0%, or the Average Net Excess Spread (as 
defined) is not less than 4.0%, an event of default will occur under one of 
the Company's outstanding warehouse facilities. The delinquency level is 
calculated as a percentage of outstanding principal balance of all automobile 
loans owned or securitized by the Company as to which a payment is more than 
thirty days past due. Upon the occurrence of an event of default under such 
warehouse facility, the lending banks under such facility would have no 
further obligation to extend additional credit. Furthermore, any such event 
of default or acceleration may trigger cross-defaults under other outstanding 
indebtedness of the Company and may result in the acceleration of amounts due 
thereunder. The increase in Classic loans, among other things, has increased 
the risk that the Company may trigger its Portfolio Loss Ratio covenants in 
the future.


    RESALE AND FINANCING OF REPOSSESSIONS  In addition to wholesale 
distribution channels, the Company has regularly disposed of repossessed 
vehicles through retail markets, primarily retail used car consignment lots. 
During the first three months of 1998, approximately 29% of repossessed 
vehicles sold were liquidated through retail markets, compared with 60% in 
the first months of 1997 and 46% in all of 1997. This strategy delays the 
Company's excess cash flow during the period repossessions are held in 
inventory pending resale, which is typically a longer period of time than for 
wholesale auctions. However, since the Company believes that this approach 
has produced higher ultimate recoveries, continued reduction in the 
percentage of repossession inventory disposed of through retail channels 
could decrease recovery rates and increase net losses. In addition, the 
Company's repossession inventory has generally increased as a percentage of 
its servicing portfolio due to the increase in the rate of loan defaults and 
changes in the number and type of dealers used for retail repossession sales. 
At March 31, 1998, the Company had $51.5 million of repossessed inventory, 
compared to $55.3 million at December 31 1997, $64.9 million at December 31, 
1996, and $17.7 million at December 31, 1995.

    With the significant increase in the number of repossessions, the Company 
has increased purchases of loans that finance resales of repossessions to new 
buyers. Delinquency, gross charge-off and net loss rates associated with 
loans on repossessed automobiles have historically been substantially in 
excess of the same statistics associated with the Company's remaining 
servicing portfolio. There can be no assurance that management's recent 
efforts to improve the Company's retail repossession finance program will be 
successful.

    As of March 31, 1997, the Company took an after-tax charge of $60.8 
million due primarily to a reduction in the estimated recovery rates on then 
current repossessed inventory and anticipated future inventory arising from 
then existing securitization transactions. There can be no assurance that a 
change in the proportions of vehicles sold through retail and wholesale 
channels, any further softening of used car markets or other factors will not 
cause the Company's recovery rate to decline further, which could require 
additional adjustments to repossession inventory or estimated recovery rates 
used to calculate finance income, together with related accounting charges. 
 
    POTENTIAL NEGATIVE IMPACT OF INCREASE IN PERSONAL BANKRUPTCIES.  Recent 
media reports have suggested an increase in the number of personal bankruptcy 
filings and during most of 1997 the Company 
 
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experienced a slight increase in the proportion of its servicing portfolio 
representing loans to borrowers who have filed for bankruptcy protection. A 
continuation or increase in such trend could contribute to greater default 
and net loss rates than the Company has historically experienced.
 
ECONOMIC CONDITIONS
 
    MARKET CONDITIONS.  Periods of economic slowdown or recession, whether 
general, regional or industry-related, may increase the risk of default on 
automobile loans and may have an adverse effect on the Company's business, 
financial condition and results of operations. Such periods also may be 
accompanied by decreased consumer demand for automobiles, resulting in 
reduced demand for automobile loans and declining values of automobiles 
securing outstanding loans, thereby weakening collateral coverage and 
increasing the possibility of losses in the event of default. The increased 
proportion of loans generated under the Company's Classic program has 
increased the Company's sensitivity to changes in economic conditions. In 
addition, recent reports of increases in consumer bankruptcy filings and 
default rates on consumer credit during a period of economic growth indicate 
that the impact of consumer behavior on default rates is not limited to 
periods of economic slowdown or recession.
 
     Moreover, significant increases in the inventory of used automobiles 
during recessionary economies may depress the prices at which repossessed 
automobiles may be sold or delay the timing of such sales. A continuation of 
the recent softening of the used car market as the result of factors 
including the recent start-up of superstore competition or forecasted levels 
of used lease vehicles that will be available in the market could have a 
similar effect on prices for and timing of sales of repossession inventory. 
There can be no assurance that the used automobile markets will be adequate 
for the sale of the Company's repossessed automobiles and any material 
deterioration of such markets could increase the Company's loan losses or 
reduce recoveries from the sale of repossession inventory. In addition, the 
Company channels a portion of its repossession inventory through retail 
resale markets instead of wholesale markets, including the financing of such 
retail sales through its Classic program, which had the effect of reducing 
the Company's loan losses while increasing repossession inventory and 
delaying cash flow recovered from inventory turnover. There can be no 
assurance that the Company will continue to use such retail resale channels, 
that it will be able to realize such benefits to loan losses in the future or 
that its inventories will not reach levels at which they cannot readily be 
liquidated through such channels. Any such event might have an adverse effect 
on loan loss levels, and on the Company's financial condition, results of 
operations and liquidity.

    INTEREST RATES.  The Company's profitability may be directly affected by 
the level of and fluctuations in interest rates, which affect the Company's 
gross interest rate spread. The Company monitors the interest rate 
environment and employs pr`efunding or other hedging strategies designed to 
mitigate the impact of changes in interest rates on its gross interest rate 
spread. However, there can be no assurance that the profitability of the 
Company would not be adversely affected during any period of changes in 
interest rates.
 
    LABOR MARKET CONDITIONS.  The Company's ability to manage portfolio 
delinquency, default and loss rates is dependent on its ability to attract 
and retain qualified servicing and collection personnel. In recent months, 
low unemployment rates driven by economic growth and the continued expansion 
of the consumer credit markets have contributed to an increase in employee 
turnover rate, especially among the Company's collection personnel. Continued 
high turnover relative to historical levels, or an inability to attract and 
retain replacement personnel, could have an adverse effect on the Company's 
portfolio delinquency, default and net loss rates and, ultimately, its 
financial condition, results of operations and liquidity.
 
LITIGATION
 
    On March 4, 1997 a shareholder commenced an action against the Company 
and certain named directors and officers of the Company entitled Taran v. 
Olympic Financial Ltd. et al. in the United States District Court for the 
District of Minnesota. Four similar lawsuits, three of them in the United 
States District Court for the District of Minnesota (Frank Dibella, on behalf 
of himself and all others similarly
 
                                       7
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situated vs. Olympic Financial Ltd. et al., Michael Diemer vs. Olympic 
Financial Ltd. et al. and Howard Pisnoy vs. Olympic Financial Ltd. et al.) 
and one in the United States District Court for the Eastern District of New 
York (North River Trading, LLC, and Allan Farkas, and All Others Similarly 
Situated vs. Olympic Financial Ltd. et al.) were filed after that time. These 
suits have been consolidated in one suit, In re Olympic Financial Ltd. 
Securities Litigation, in the United States District Court for the District 
of Minnesota. Plaintiffs in the consolidated action allege that during the 
period from July 20, 1995 through March 3, 1997 the defendants, in violation 
of federal securities laws, engaged in a scheme that had the effect of 
artificially inflating, maintaining and otherwise manipulating the value of 
the Company's Common Stock by, among other things, making baseless, false and 
misleading statements about the current state and future prospects of the 
Company, particularly with respect to the Classic program and the refinancing 
of repossessed automobiles. Plaintiffs allege that this scheme included 
making false and misleading statements and/or concealing material adverse 
facts. The consolidated action is in the preliminary stages and the parties 
have not begun discovery. The Company has reviewed the complaint in the 
consolidated action and believes that the consolidated action is without 
merit and intends to defend it vigorously. There can, however, be no 
assurance that the Company will prevail in such defense or that any order, 
judgment, settlement or decree arising out of this litigation will not have a 
material adverse effect on the Company's financial condition, results of 
operations or liquidity.

    Another case which was filed November 8, 1996, Powell et al. v. Arcadia 
Financial Ltd. et al., involves a complaint by 200 borrowers who purchased 
vehicles from a dealer which sold certain of the Company's repossessed vehicles 
on a consignment basis. The plaintiffs in this case allege that the Company is 
either directly or vicariously liable for damages incurred as a result of the 
consignment dealer's alleged wrongful actions. The Company is seeking to 
resolve the matter through the mediation process. There can, however, be no 
assurance that the Company will prevail in such defense or that any order, 
judgement, settlement or decree arising out of this litigation will not have 
a material adverse effect on the Company's financial condition, results of 
operations or liquidity.

       The nature of the Company's business is such that it is routinely a 
party or subject to other items of pending or threatened litigation, 
including litigation involving actions against borrowers to collect amounts 
on loans or to repossess vehicles and litigation challenging the terms of 
loans purchased by the Company. Although the ultimate outcome of certain of 
these matters cannot be predicted, management of the Company believes, based 
upon information currently available and the advice of counsel, that the 
resolution of those various matters currently pending will not result in any 
material adverse effect on the Company's financial condition, results of 
operations or liquidity.

MANAGEMENT OF GROWTH

    The historical growth of the Company's servicing portfolio and the 
greater proportion of Classic loans contained in that portfolio have resulted 
in increased demands on the Company's personnel and systems. The Company's 
ability to support, manage and control growth is dependent upon, among other 
things, its ability to hire, train, supervise and manage its larger 
workforce. Furthermore, the Company's ability to manage portfolio delinquency 
and loss rates is dependent upon the maintenance of efficient collection and 
repossession procedures and adequate staffing therefor. There can be no 
assurance that the Company will have trained personnel and systems adequate 
to support its key initiatives. Since 1996 the Company has opened four 
regional collection centers and taken a number of initiatives to improve its 
servicing and collection performance. There can be no assurance that these 
efforts will be successful.

COMPETITION
 
    The business of financing automobiles is highly competitive. Existing and 
potential competitors include well-established financial institutions, such 
as banks, other automobile finance companies, small loan companies, thrifts, 
leasing companies and captive finance companies owned by automobile 
manufacturers, such as General Motors Acceptance Corporation, Chrysler Credit 
Corp. and Ford Motor Credit Company. Many of these competitors have greater 
financial, technical and marketing resources than the Company and from time 
to time offer special buyer incentives in the form of below-market interest 
rates on certain classes of vehicles. Many of such competitors also have 
longstanding relationships with automobile dealers and some of such major 
competitors provide other forms of financing to automobile dealers, including 
dealer floor plan financing and leasing, which are not provided by the 
Company. There can be no assurance that the Company will be able to compete 
successfully with such competitors.
 
REGULATION
 
    The Company's business is subject to numerous federal and state consumer 
protection laws and regulations, which, among other things: (i) require the 
Company to obtain and maintain certain licenses and qualifications; (ii) 
limit the interest rates, fees and other charges the Company is allowed to 
charge; (iii) limit or prescribe certain other terms of the Company's 
automobile loan contracts; (iv) require specific disclosures; and (v) define 
the Company's rights to repossess and sell collateral. The Company believes 
it is in substantial compliance with all such laws and regulations, and that 
such laws and regulations have had no material effect on the Company's 
ability to operate its business. Changes in existing laws or regulations, or 
in the interpretation thereof, or the promulgation of any additional laws or 
regulations, could have a material adverse effect on the Company's business, 
financial condition and results of operations and upon its outstanding 
securities.
 
UNDESIGNATED SHARES; ANTI-TAKEOVER CONSIDERATIONS
 
    The authorized and unissued stock of the Company, other than shares reserved
for issuance pursuant to options and warrants, consists of undesignated shares.
The Board of Directors, without any action by the Company's shareholders, is
authorized to designate and issue the undesignated shares in such classes or
series as it deems appropriate and to establish the rights, preferences and
privileges of such shares, including dividend, liquidation and voting rights.
The Company has adopted a shareholder rights plan to deter a hostile takeover.
Further, certain provisions of the Minnesota Business Corporation Act may
operate to discourage a negotiated acquisition or unsolicited takeover of the
Company. Each or any of the foregoing could have the effect of entrenching the
Company's directors, impeding or deterring an unsolicited tender offer or
takeover proposal regarding the Company and thereby depriving the then current
shareholders of the ability to sell their shares at a premium over the market
price, or otherwise adversely affecting the voting power, dividend, liquidation
and other rights of holders of Common Stock.
 
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